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Danish Tax Tribunal rules Luxembourg intermediary the beneficial owner of Danish dividends and declares the Parent-Subsidiary Directive applicable
21/05/2010 @ 01:35
In April 2010 the Danish Tax Tribunal decided that a holding company resident in Luxembourg was the beneficial owner of dividends distributed by a holding company resident in Denmark
Various investors had acquired a Danish company (DK) through a holding company in Luxembourg (LHC). DK distributed dividends to its parent company, LHC. On the day of the dividend distributions, LHC granted 2 loans to DK for the same amount as the distributed dividends. The Danish tax authorities argued that the dividend payment was subject to Danish withholding tax, based on the following arguments:
– LHC was not the beneficial owner of the dividends since (i) it did not carry out an active business (it’s only activity was holding the DK shares), and (ii) had no real power to act regarding the disposition of the dividends.
– The EU Parent-Subsidiary Directive (the PSD), which under circumstances provides for withholding tax exemption for dividend payments between EU companies, did not prevent Denmark from levying withholding tax on the dividends in question as it allows Member States to apply anti-avoidance measures for the prevention of fraud or abuse.
Under Danish law, dividends paid to non-resident companies are subject to a 28% withholding tax unless such withholding tax is reduced by a tax treaty or the PSD. Under the Denmark-Luxembourg Treaty, dividend payments from Denmark to Luxembourg may be reduced to 5%.
Under the Danish law implementing the PSD as it applied at that time, dividends paid to non-resident EU companies were exempt from dividend withholding tax under mild conditions, i.e. ownership of at least 10% of the capital in the Danish subsidiary for at least one year.
Danish domestic law did not include specific anti-avoidance rules on beneficial ownership. Therefore, only, the general Danish anti-avoidance rules could be applied.
The Danish Tax Tribunal, making reference to the Commentary to Article 10 of the OECD Model Tax Convention on Income and Capital, decided that a conduit company could only be disregarded as the beneficial owner of dividends if the company had very narrow powers to act regarding the disposition of the dividends. However, such narrow powers were not in themselves sufficient to disregard a company as the beneficial owner of the dividends.
Since LHC had not redistributed the dividends, it could not be regarded as a conduit company in respect of the dividends. Moreover, LHC could be considered to have access to the PSD because the conditions for applying the “substance-over-form” and the “assignment of income” doctrines under Danish domestic law were not met.
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